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THE CONSEQUENCES OF AN INVALID CONTRACT AND PRACTICAL ISSUES REGARDING THE REQUIREMENT TO RETURN WHAT HAS BEEN RECEIVED

15-10-25 MTParners

According to Article 131 of the Civil Code 2015, the legal consequences of an invalid civil transaction are as follows:

1. An invalid civil transaction shall not give rise to, change, or terminate any civil rights or obligations of the parties from the time the transaction was established.

2. When a civil transaction is declared invalid, the parties must restore the original state and return to each other what they have received.

          If it is impossible to return in kind, the value of the received property must be repaid in money.

3. A bona fide party in collecting fruits or profits shall not be required to return such fruits or profits.

4. A party at fault causing damage must compensate for such damage.

5. The settlement of consequences of an invalid civil transaction relating to personal rights shall be governed by this Code and other relevant laws.

Accordingly, the main consequences of an invalid transaction include:

• The transaction has no legal effect;

• The parties must return what they have received (either in kind or in monetary value);

• The party at fault must compensate for damages.

Although the provisions seem clear, Article 131 of the 2015 Civil Code does not differentiate between the various types of transactions, particularly those involving goods, consumable assets, or items subject to depreciation.

In practice, dispute resolution bodies have adopted two different interpretations regarding the obligation to “return what has been received”:

🔸 First interpretation:
“Return what has been received” means the parties must return the goods in their original condition at the time of receipt, i.e., new and intact.
→ This view appears in certain court judgments where the buyer was required to return “new equivalent goods,” on the reasoning that used or depreciated goods could not be considered a valid “return in kind.”

🔸 Second interpretation:
“Return what has been received” means returning the actual goods received, even if they have depreciated or been partially damaged, except where physical restitution is impossible.
→ In such cases, the depreciation in value is treated as damage, and the party at fault (e.g., one who improperly used the goods) must compensate under Clause 4, Article 131.

From our perspective, the second interpretation aligns more closely with the spirit of civil law, for the following reasons:

1. Clause 3, Article 131 (“if it is impossible to return in kind, the value shall be repaid in money”) implicitly recognizes situations where the object no longer exists at the time of return — but does not include cases where goods merely depreciate or wear out naturally.

2. In transactions involving goods, requiring the return of “new goods” is unrealistic and distorts the principle of restoring the parties to their original positions, as the transfer and use of goods naturally involve wear and tear.

3. If the depreciation in goods’ value is treated as damage, the key legal issue should be the determination of fault — this is the central point of Article 131. Accordingly, depending on the degree of fault of each party, damages should be assessed and allocated appropriately.

The above reflects our practical observations and experience from handling several similar cases. MT & Partners hopes this article provides useful insights for our readers.